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Margin calls on S'pore shares worsening, but little systemic risk seen



MARGIN calls are surging as the stock market stumbles, but industry insiders see little systemic risk because investors and broking houses were already battening down the hatches before the latest pullback.

The Singapore stock market has been steadily losing altitude since hitting a seven-year high in April 2015, and at Thursday's close, the Straits Times Index is down at a four-year low of 2,532.70.

The tumble has been particularly acute in the first few weeks of the new year amid concerns about economic slowdown around the region, and that has affected the value of stock-based collateral.

"We have issued more margin calls this month on average as a result of market volatility, but these continue to be limited to a very small percentage of our customers," OCBC Securities managing director Raymond Chee said. "Forced sales arising from an inability to meet margin calls affect an even smaller group of customers."

While margin calls in the final months of 2015 mostly affected smaller companies, blue chips are bearing the brunt of the current rout, one senior dealer said.

"The small caps already got decimated sometime back, in November and December," the dealer said. "This time around, it's more triggered by the blue chip stocks."

The inherent risk in collateral calls is that they can lead to forced sales and defaults if the borrower cannot put up the difference on time.

Forced sales can have knock-on effects. For example, shares of offshore and marine company Ezra Holdings fell 17 per cent on Wednesday on a rash of negative news, including the fact that an investment firm fully owned by chief executive Lionel Lee had been forced to sell 11.5 million shares for about S$913,341 a week earlier. Those shares had been pledged for a corporate loan for another company that is unrelated to Ezra, an Ezra spokesman had told BT.

"Margin calls and forced selling can lead to a vicious cycle downwards," a senior dealer said. "You have a margin call, and you're selling shares in a downward market. You sell your own stock, and you're pushing down the price, which affects the remainder of your positions."

The problem is slightly different for contra speculators, who do not need to put up collateral and seek to close out positions before the end of a settlement period. Instead of collateral calls, the bigger challenge for contra traders is trying to recover in the midst of a prolonged slump, and finding cash flow to cover losses.

"On the contra side, it's like trying to catch a falling knife," the senior dealer said.

But industry professionals said that the increase in margin calls and forced sales were largely manageable.

A key mitigation factor is the fact that the market has been struggling for a while, giving the market ample time and incentive to shore up their defences.

One trader noted that the lacklustre volumes over the past several months meant that many investors were not stretching their margin facilities to begin with. The list of acceptable collateral was also rather short.

"With the market going a certain direction for a long time, not a lot of stocks are included in the marginable list," the trader said. "Within the firms, the margin departments were quite cautious to begin with."

Said OCBC's Mr Chee: "We regularly stress-test the portfolios of all our customers with share financing accounts. Closely monitoring the composition of their shares helps us to proactively engage our customers to adjust their margin levels and re-balance their portfolios, if necessary. In this way, we minimise the risk that we and our remisiers face."

On the contra front, IG market strategist Bernard Aw said that contra trading has lost popularity since the penny stock crash of October 2013, so the impact from contra traders might be limited.

The senior dealer said that the market might stabilise closer to the Chinese New Year, which falls on Feb 8.

"Clients are taking margin calls more seriously, so they're taking proactive steps. Previously, they were just buying and holding, now we're seeing clients take more aggressive action, some are selling to pay up in full. When you have this kind of situation, the market will stabilise," the senior dealer said.

The one concern would be that when the market is ready for bargain hunting, investors might have cut back too much on capacity and recovery may take longer.

"The speculative fervour will be cut off," the senior dealer said. "When there's selling like this, people are naturally injured . . . you can't expect them to get up and running."